Are Investors Influenced by How Earnings Press Releases are Written?

Earnings press releases are an important means by which many firms communicate to investors. This study examines whether investors are influenced by how earnings press releases are written - the tone and other stylistic attributes - using actual earnings press releases and archival capital markets data in a standard short-window event study. To measure the tone and other stylistic aspects of press releases, I use elementary computer-based content analysis. Tone is measured using a frequency count of positive or negative words. Other stylistic aspects are the overall length of the press release, the overall percentage of numbers versus words, and the complexity of the words used. Results suggest that tone of earnings press releases influences investors' reactions to earnings. An explanation for this result is provided by prospect theory (Tversky and Kahneman, 1981, 1986), which predicts that framing financial performance in positive terms, will cause investors to think about the results in terms of increases relative to reference points. Limited evidence is presented that other stylistic attributes of earnings press releases affect investors' reactions to earnings.